Research generally neglects to identify whether interventions were motivated by industrial policy reasons or rent-seeking considerations. In fact, there is no evidence to suggest that intervention for industrial policy reasons in trade even exists. Instead, existing evidence suggests that protective measures are often motivated by optimal tariff considerations, for revenue generation, or to protect special interests (see Broda et al. 2008, Gawande et al. 2005, Goldberg and Maggi 1999, and Mobarak and Purbasari 2006). Tariff protection is also frequently granted to less successful firms or declining industries that have political power (Beason and Weinstein 1996 and Lee 1996).
If such measures are part of a broader effort to achieve technological upgrading then they may be helpful, whereas if they are implemented in isolation they are likely to fail.
Instead of blanket subsidies for exports and FDI, one can try to attract multinationals to produce key inputs or to bring specific knowledge needed by clusters with the ability to absorb them. As Chandra and Kolavalli (2006) have put it, “without host-country policies to develop local capabilities, MNC-led exports are likely to remain technologically stagnant, leaving developing countries unable to progress beyond the assembly of imported components” (p. 19).
First, soft industrial policy reduces the scope for corruption and rent seeking associated with hard industrial policy such as protection or selective production subsidies. Second, soft industrial policy is much more compatible with the multilateral and bilateral trade and investment agreements that many LDCs have implemented over the last decades.